Why WACC, IRR, and NPV can mislead you

🛠 THE CFO EFFECT PLAYBOOK (Part III)

Step One: What NPV really tells you, and what it hides

At its core, the Net Present Value (NPV) tries to answer a simple question:

“If I invest $1M today, how much are those future cash flows worth today after accounting for time and risk?”

If the discounted value of those cash flows exceeds the initial investment, you’re creating value.

If not, you’re destroying it.

Simple enough.

Example:
Let’s say you’re investing $1M in a new manufacturing line.
You expect:

• Year 1: $200K

• Year 2: $300K

• Year 3: $300K

• Years 4–6: $400K per year

Discount those cash flows back at your cost of capital (say 10%) and you get your NPV.

✅ If NPV > 0 → you’re creating value
❌ If NPV < 0 → you’re destroying value

But here’s the catch: that 10% “cost of capital” is not a fact.

It’s an assumption dressed up as science.

Step Two: How the WACC is beautiful in theory, messy in reality

Your Weighted Average Cost of Capital (WACC) blends your cost of debt and cost of equity.

But the second you change your capital structure (your debt ratio, your equity mix, your risk profile), your WACC changes too.

Think about it:

• Add a risky project → lenders demand higher rates → your cost of debt goes up.

• Add volatility to cash flows → investors expect higher return → your cost of equity rises.

• Market rates shift → the “risk-free” component moves overnight.

So, when you use your current WACC to evaluate a future project, you’re assuming:

1. Your company’s risk profile stays constant.

2. Your cost of debt never changes.

3. The market will price your equity risk the same way tomorrow.

That’s rarely true.

And yet, every model in corporate finance treats WACC as if it’s static.  

A single, fixed number that magically represents your long-term cost of capital.

It’s not.
In reality, it’s a moving target.

Step Three: The IRR trap

Now, let’s talk about Internal Rate of Return (IRR).

A favorite of boards and founders because it feels intuitive:

“This project generates 20% IRR, so we’re good!”

What IRR actually means:

It’s the discount rate at which your NPV becomes zero.

So, if your project’s IRR is 20%, it means your cost of capital can rise to 20% before you stop creating value.

Anything below that, you’re adding value.

Anything above, you’re losing it.

Sounds clear, but there’s a dangerous blind spot:

IRR ignores reinvestment risk.

Let’s say you’re comparing two projects:

Project A has a 3 year IRR of 20%

Project B has 10 year IRR of 15%

At first glance, Project A looks better.

But once you get your cash back after three years, can you really reinvest it again at 20% IRR?
Unlikely.

A 15% return you can sustain over 10 years may create more absolute value (and less risk) than a flashy 20% on paper.

This is why strategic CFOs look beyond the headline number.
They ask:

• When do I get my money back?

• How certain are those future flows?

• What can I do with the reinvested capital?

IRR is a speedometer, not a map.

Step Four: The myth of precision

Finance loves decimals.
A 9.87% WACC feels smarter than saying “around 10%.”

But that precision is an illusion.

Each of these inputs (beta, market premium, cost of debt) is built on layers of assumptions:

• Historical betas that no longer reflect your business model.

• Market premiums that change with macro sentiment.

• Discount rates that ignore structural risk shifts.

So, when you present an NPV of $120,456 and an IRR of 18.2%, don’t kid yourself, it’s not accuracy.

The right question isn’t:

“What’s the IRR?”
It’s:
“How sensitive is this project to small changes in assumptions?”

That’s where real insight lives.

Step Five: The CFO’s real job

Numbers should inform your judgment instead of replacing it.

The best CFOs use models to frame decisions.
Because capital allocation is about who understands value, risk, and optionality the best.

So next time someone tells you:

“The NPV is positive, we should invest.”

Ask:

• What WACC did we use, and will it still hold after this project?

• What happens if inflation or interest rates move by 200bps?

• Can we actually reinvest early cash flows at the same IRR?

• What’s the opportunity cost of deploying this capital here vs. elsewhere?

Those questions separate finance operators from strategic CFOs.

The Practical Takeaway

• WACC is a moving target. Treat it as a range instead of a constant.

• IRR ignores reinvestment risk. Remember that sometimes long, steady returns can beat short, flashy ones.

• NPV isn’t absolute truth. It’s a directional tool sensitive to every assumption.

• Precision ≠ accuracy. Challenge every number in your model.

• Capital allocation is judgment. Your job isn’t to forecast perfectly. It’s to make smart trade-offs under uncertainty.

Next Week’s Episode:

🔜 Why every CFO should audit the COGS

The best CFOs constantly question numbers.

Most finance leaders treat COGS like a black box.
It’s “just there” on the P&L, until you realize it’s quietly distorting your entire view of profitability.

Next Sunday, I’ll show you exactly why every CFO should audit their COGS, and what hidden leaks might be hiding inside your margins:

✅ The common accounting errors that make your gross margin unreliable
✅ How marketing and operations costs sneak into COGS unnoticed
✅ The real-world impact of misclassifications (and how to fix them fast)
✅ A step-by-step checklist to ensure your COGS actually reflects sales, not shipments

Because if your COGS is wrong, your entire financial story is wrong.

Top finance leaders don’t accept volatility they can’t explain.

They open the box, trace every dollar, and rebuild the integrity of their margins from the ground up.

If you want to trust your gross margin, your pricing strategy, and your profitability again, you can’t afford to miss this episode.

Disclaimer:
This content is for informational and educational purposes only and should not be construed as financial, legal, or professional advice. Always consult with a qualified advisor before making any business or financial decisions. The author and publisher disclaim any liability for actions taken based on this content.

Talk soon,